There are several implications arising from the supposed intention of some clients to offer bridging loans to agencies instead of prompt payment.
The first is the question of agency income versus third party costs. If Agency A has income of £0.5m a month, £6m a year, their profit, if they are good at managing their money, would be £100,000 a month before tax. For many agencies the monthly management of cash is a constant preoccupation because the margin of profit is (relatively) slim.
Secondly third party costs – media and production – are usually significantly greater than the free cash flow available to most agencies. Any slippage in payment of third party costs can create havoc for most agencies. In the early ’90’s at Simons Palmer a client query at Virgin Atlantic led to delays in payment for a TV commercial that was on air. Our finance director pointed out to me we would be unable to cover the payroll due in a week if Virgin failed to settle the debt. We had no choice but to threaten the client with immediate legal action and we were paid the same day. Sadly it ended our relationship and the client moved to RKCR.
Thirdly clients often don’t understand and/or ignore the legal position of agencies as agencies are principals in law for any work commissioned on behalf of a client. Both production and media costs are contracted between the agency and the provider, not the client. This is a very delicate position and dangerous because a bad debt could easily sink an agency. This is why on production 50 per cent of the agreed quote is billed before any work starts. As media payment is strictly scheduled, any deviation means that airtime would be pulled.
The claim that clients are suggesting they provide a bridging loan is quite staggering as it creates a double whammy of indebtedness. Say it was for a TV production costing £500K. The agency would owe the production company this amount and also the provider of the loan, plus a bridging loan would attract a high interest rate. It is plausible the agency could be caught with both debts. The most likely culprits could be clients in financial services. It would be a way of them making profit out of their own commitments.
Over the years nine out of ten clients I’ve dealt with have been exemplary at understanding and dealing with money issues. I would say that the odd one could cause a great deal of grief and wasted time. My advice to any agency confronted with continued problems with a client on payment issues is to walk away. It might be painful initially due to the loss of income but, in the medium term, you are going to be better off without them.